Select Committee on Transport Thirteenth Report

5  The CAA's resources

The CAA's funding model

91. The CAA does not have monies voted to it by Parliament and must instead recover its operating costs, plus a rate of return on capital set by the Government, through charges on the aviation industry for its regulatory services and on users of UK airspace through the Eurocontrol en route charges system. The CAA consults on its budget annually with the industry and with the Secretary of State.[133] The BRC highlighted potential problems with this type of funding model in its 2003 publication on alternatives to classic regulation:

"[…] certain regulatory bodies [that] pass on their costs to those they regulate may have little incentive to minimise these costs (though the regulated will try to ensure they do so). Some may want to impose high standards in order to avoid blame if things go wrong. And there may be little pressure to withdraw from regulatory areas, unlike in a competitive market where rivals will constrain growth."[134]

92. We found during our inquiry that the rationale for the CAA's funding model was not well understood and was the source of disaffection among many of those charged with paying the bill. British Airways argued, for instance, that the CAA's funding arrangements worked badly, while appearing to "serve the purposes of the CAA, the Treasury and the [Department for Transport]."[135] It said that it had been too easy for the CAA to finance activities it wished to pursue, with little incentive to ensure that longstanding activities remained "necessary, proportionate and efficient."[136]

93. Several organisations proposed some change in the funding model. The Guild of Air Pilots and Air Navigators argued that funding of the CAA should come either from central Government, in line with other European states, or from a small surcharge to the beneficiaries of aviation safety regulation, the passengers.[137] The British Helicopter Advisory Board contended that the entire regulatory cost of aviation in the UK could be met by a passenger levy of approximately £1 per passenger journey.[138]

94. Dr Mark Thatcher from the London School of Economics explained to us that, while the UK funding model was currently unique in Europe, there might be moves towards this model in other countries over time.[139] David McMillan, Director of the Aviation Directorate at the Department for Transport, provided us with further detail, explaining that the French Direction Générale de l'Aviation Civile had started charging the French industry for certification activities and that other countries were considering the same thing. It said that the tendency in Europe was moving towards users paying as opposed to government paying.[140] Sir Roy McNulty told us that, although the CAA's funding model caused a significant degree of disagreement with its charge payers, he believed that it was the best funding option, because it placed a clear obligation on the CAA to try to deliver value for money.[141]

95. The basic principle of the existing funding model, in which the CAA recovers its costs from those it regulates, is fair, and we are reassured to note that other European states are moving towards this model. There is, however, considerable dissatisfaction with the current unique position of the UK model among those charged with paying the bill. We recommend that the Government and the CAA publish a justification of the funding model to ensure that the rationale is well understood by all those who must meet the costs of the CAA. We further recommend that the CAA clearly demonstrate to those it regulates and those on whose behalf it regulates that it is avoiding the potential problems associated with this form of funding identified by the Better Regulation Commission: namely failing to keep its costs to a minimum, gold-plating, and failing to withdraw from unnecessary regulatory areas.

External audit

96. The CAA Sponsorship Statement stipulates that its accounts will be audited by independent auditors appointed by the Secretary of State, and that the audited accounts will then be laid before Parliament.[142] This auditing provides for no assessment of efficiency or value for money, however.[143]

97. The House of Lords Constitution Committee said in 2004 that it found it "anomalous" that the National Audit Office (NAO) did not have unqualified access to all of the economic regulators.[144] The Committee noted that just three regulators were exempt—the CAA, Ofcom and the Financial Services Authority—and that Ofcom was set to become subject to scrutiny by the NAO under the Communications Act 2003. The Committee rejected the Government's argument that the three regulators were exempt because they were each funded by fees and charges, and that there was therefore no taxpayers' interest to be protected, pointing out that the NAO scrutinised Ofwat despite it being fully funded from licence fees payable by the regulated companies. The Committee recommended that the NAO should have "access consistently to all regulatory bodies", with a view to "monitoring their cost-effectiveness and budgetary control."[145]

98. While this recommendation was rejected by the Government, we again heard calls during the course of our inquiry for a body such as the NAO to be asked to provide an assessment of the financial management of the CAA. Dr Mark Thatcher told us that he did not understand why the CAA was not scrutinised by the NAO, given that it was "a public body with public powers."[146]

99. The CAA acknowledged that its cost base should be more open to scrutiny, telling us that it was clear that those from whom it recovered its costs desired a greater degree of transparency. It explained that it was working with its external auditors, PricewaterhouseCoopers, to review the CAA's report and accounts against the criteria used to assess and benchmark the accounts of other public sector organisations, as part of the 'Towards Best Practice' scheme jointly sponsored by the NAO and PricewaterhouseCoopers. It argued, however, that it believed that it was important that the CAA retained "flexibility in the deployment of its resources", and that it therefore remained of the opinion that the existing structure of 'commercial' external audit and consultation with industry was preferable to oversight by the NAO and the creation of an additional layer of accountability.[147] Rowena Burns of the Manchester Airports Group supported this approach. She called for the CAA to be allowed to continue the improvements it had made in recent years to the transparency of its costs, arguing that the introduction of a third party to scrutinise its finances might drive up the costs of regulation. She stated that, while she was not opposed to the CAA being subject to independent scrutiny, she believed that its primary obligation was to convince both its airlines and its airports that it was conducting itself in a cost-effective manner.[148]

100. Dr Graham Braithwaite of Cranfield University argued, however, that the accountability of the CAA needed to extend beyond those it regulated. He cautioned against excessive involvement of those being regulated in reviewing the work of the CAA telling us that:

"[…] the accountability should not be spread so much that the industry it is supposed to be regulating is pulling the strings of the CAA. I know there would be big concerns if the industry itself was pushing the CAA to be overly accountable to them as opposed to an independent agency."[149]

101. Several independent regulators subject to scrutiny by the National Audit Office (NAO), including Ofcom and Ofwat, are organised similarly to the CAA. We do not believe that it is sufficient for the CAA to enter into consultation with those it regulates to increase transparency and accountability. The CAA, as a public organisation, has a wider accountability. We recommend that the NAO be granted access to the CAA to conduct value for money and efficiency studies consistent with those carried out for other regulators.

Joint Review Team review of the Safety Regulation Group's costs and charges

102. The largest element of CAA costs relate to the Safety Regulation Group, and the CAA told us that it had become increasingly clear in recent years that some sectors of the industry had been paying more than their fair share of these costs. The CAA explained that its Board had therefore appointed a Joint Review Team in 2004, comprising representatives from different parts of the industry, the CAA and Government, to consider the distribution of the Safety Regulation Group costs. It said that the aim of the review was to achieve charges mechanisms that were "more cost-related, fair and reasonable", that "minimised cross-subsidies between and within charges schemes", and that "improved the transparency" of the Safety Regulation Group's charges.[150]

103. The CAA told us that, as a result of the review, proposals were developed for revisions to the charges schemes that could, over a period of 5 years, have a significant impact on charges to certain sectors of the aviation industry. It said that it intended to phase in the modifications to the charges structure in order to alleviate the financial impact on the smaller operators, and that it was seeking to minimise as far as possible the impact that the proposed increased charges would have on general aviation.[151]

104. Despite these assurances, several smaller operators expressed their concern about the changes to us. The GA Alliance said that the change represented a transfer of £4 million of costs per year from general aviation to airlines, and said that this cost structure was untenable.[152] The British Microlight Aircraft Association argued that the charging scheme should take more account of the ability to pay of those that it affected, and that failure to do so could result in some pilots "choosing to fly outside the law."[153]

105. The changes to the Safety Regulation Group's charges are likely to have a significant impact on members of the general aviation community and we are concerned by the suggestion that some pilots may choose to fly "outside the law". We therefore recommend that the Government and the CAA carefully monitor the impact of these changes, and take action where necessary to ensure that charges are fair and equitable and that operators in the general aviation sector are not unduly affected.

Rate of return

106. The Department for Transport explained to us that the CAA's regulatory sector, comprising safety regulation, economic regulation and consumer protection, was normally required to achieve the higher of either an average annual 6% rate of return on the average current cost of capital employed, or break-even after charging interest and tax. The Department told us that, in a normal year, the 6% rate of return represented a monetary value in the order of £1.8m, compared to CAA turnover of approximately £81m. It explained that the return was used to pay National Loans Fund repayments and interest, and for the funding of minor capital expenditure and taxation. It also noted that the return was being used to help fund the cost of transition from the UK basis of regulation to the EASA model, with the agreement of HM Treasury.[154]

107. The Treasury reduced the average real return on capital required of many public sector organisations, where there is no competition and no realistic prospect of competition from the private sector, from 6% to 3.5% on 1 April 2003.[155] Although the Treasury guidance issued in relation to this reduction did not cover self-financing public corporations such as the CAA, several witnesses argued that the same rate of 3.5% should be applicable.[156] Keith Jowett of the Airport Operators Association accepted that, as there was such a long history of the charging arrangements in the UK, it would be "invidious to propose costs going back onto the UK taxpayer", but he contended that the current charge meant that the UK industry was not on a level playing field with its European counterparts.[157] He said that the Airport Operators Association was concerned that industry was being "double penalised":[158]

"As well as paying all of the costs of our regulator, which is not the case on the continent, we are also being charged what essentially becomes a profit margin to the Government for that regulation [representing] an assumed risk on capital of about 3.5% over and above inflation, and we cannot see that this business, in terms of revenue flows to the Government, has any risk at all relating to it."[159]

Mr Jowett argued that the increasing ease of relocation of aviation activity across the world meant that the UK economy could be adversely affected if aviation organisations found costs in the UK to be prohibitive.[160]

108. The Department informed us that the rate had been formally reviewed in 1997/98, and had been reduced at that time from an 8% three-year rolling average to 6%. It said that the Government considered 6% to be a "reasonable rate of return" for the risks the CAA faced.[161] It explained that, while there had been no asset transfers to the CAA, it had been required to borrow funds—most notably to build Aviation House—and that it also continued to face a pension liability, property commitments and the potential for professional indemnity and third party liabilities. The Department told us that the return was not a 6% profit but was, instead, a recognition of the costs of those capital assets involved in the business.[162] It accepted, however, that the aviation industry would prefer the rate of return to be more consistent with the 3.5% required of other Government bodies/agencies, and it told us that it would, in conjunction with the Treasury, "consider carefully the views of the aviation industry in this respect."[163]

109. We welcome the Government's promise to reconsider the level of the CAA's required return on capital employed and recommend that, once complete, it should publish a detailed explanation of this review process and a justification of the level settled on. We recommend further that the level be kept under regular review to ensure that it remains at the lowest level necessary to allow the CAA to function effectively and provide a fair, not asset-sweating, return to the Exchequer.

Value for money and financial accountability

110. Some users of the CAA's services claimed that the CAA failed to provide value for money in certain respects. De Havilland Support Limited, for instance, pointed to inadequacies among CAA surveyors. It complained that the industry was forced to pay the cost of CAA personnel learning about different aircraft types and systems, and explained that when the surveyor overseeing a long-term project was changed it was often the case that the new surveyor had a different interpretation of the requirements, meaning that previous agreements with the CAA, even those made in writing, were overturned.[164] More commonly, witnesses did not provide us with specific examples of the CAA failing to provide value for money, but argued instead that more information regarding its operations would be beneficial. The Airport Operators Association believed, for instance, that there was "scope for greater ongoing scrutiny of the CAA's cost base".[165]

111. The CAA argued that it had performed well recently in terms of efficiency and cost effectiveness, explaining that it had reduced its manpower by over 12% between 2001 and 2005, despite an increase of 10% in the number of commercial flights and an increase in the CAA's responsibilities and workload. It noted also that its operating costs, excluding Air Safety Support International, had fallen by 2.6% over the same period, equating to a reduction of more than 9% in real terms.[166] The CAA's Corporate Plan 2005/06 made reference to internal financial targets designed to control costs, and the CAA explained to us that its Continuous Improvement Programme, scheduled for 2006/07, would include quantifiable targets for each of its improvement initiatives, with progress against these being monitored and reported to the Board.[167]

112. In order to retain the trust of those it regulates and those on whose behalf it regulates, it is important that the CAA not only keeps its costs in check and provides value for money, but that it demonstrates that it is doing so. We recommend that the CAA publish more detailed information about its financial management processes and more data relating to its performance in this area. We welcome the CAA's move to producing quantifiable targets for efficiencies as part of its 2006/07 Continuous Improvement Programme. We recommend that progress against these targets is subsequently reported in sufficient detail in the CAA's annual reports and corporate plans, with clear reconciliation between targeted and achieved efficiency gains, to allow the CAA's stakeholders, including Parliament, to scrutinise the Authority's performance effectively.

Recruitment and retention

113. The CAA told us that its ability to fulfil its statutory remit, to deliver its corporate plan and to relate effectively to the aviation sector both in the UK and internationally, was "primarily dependent on the capability and quality of [its] staff."[168] It said that its current and future success would be determined by its ability to "attract, retain, develop and motivate high quality staff with appropriate skills, knowledge, experience and competencies".[169]

114. However, some witnesses noted certain failings among CAA staff. De Havilland Support Limited argued that CAA staff "lack skill, knowledge and experience of the sector and are inconsistent, adding significantly to industry costs with no improvement in safety", while the Airport Operators Association suggested that some CAA employees may be too specialised, and that the CAA would therefore benefit from a broadening of the skills of its field personnel.[170] Prospect commented on skill shortages in some areas of the CAA, telling us that within the past 18 months there had been two separate recruitment exercises in the Air Traffic Services Investigation arm of the CAA which failed to attract sufficient suitable candidates, leaving the posts unfilled. It said that, despite a number of separate initiatives for recruitment and market pay supplements, there continued to be a gap between the resources required and the staff in post. It argued that a common factor in the recruitment difficulties was the lower level of salaries offered by the CAA compared to those available within the larger air traffic service units of NATS.[171]

115. The CAA responded to Prospect's claims by arguing that it was no different from any other medium-to-large organisation in that, at any given date, it had a number of vacancies as part of ordinary organisational "churn".[172] It accepted that the 64 (9.9%) unfilled posts within the Safety Regulation Group as at 31 December 2005 represented an "unusually high" level, but argued that this should be viewed in the context of the transition of some safety regulatory activities to EASA.[173] It explained that it had budgeted for above-inflation increases in the market-related supplements paid to certain sections of CAA staff as part of its planning in 2005/06, in order to ensure that it avoided "getting behind again in areas such as pilot and Air Traffic Controller pay."[174]

116. We are concerned by the evidence we have heard about the CAA's ability to recruit and retain appropriately qualified and experienced staff in the face of limited resources and competition from private sector organisations such as National Air Traffic Services. Although we note that "churn" within the CAA has been affected by the European Aviation Safety Agency, we do not find it acceptable that it should have 10% of its safety regulation posts unfilled at any time. We recommend that the Government review the effectiveness of market supplements as a means of bridging salary disparities. We further recommend that the CAA and the Government consider non-financial incentives for making careers with the CAA more attractive, including provisions for flexible working, training and personal development.

133   Ev 189, para 10 Back

134   Better Regulation task Force, Imaginative Thinking for Better Regulation, September 2003, p19 Back

135   Ev 101, para 32 Back

136   ibid. Back

137   Ev 229; see also Ev 132, pp 2-3 Back

138   Ev 227, para 2.2 Back

139   Qq 501-502 Back

140   Q 632 Back

141   Q 16 Back

142   Department for Transport, Sponsorship Statement for the Civil Aviation Authority, para 5.2  Back

143   Civil Aviation Authority, Annual Report and Accounts 2005, p60 Back

144   Select Committee on the Constitution, Sixth Report of Session 2003-04, The Regulatory State: Ensuring its Accountability, HL 68-I, para 207 Back

145   Select Committee on the Constitution, Sixth Report of Session 2003-04, The Regulatory State: Ensuring its Accountability, HL 68-I, paras 207-212 Back

146   Qq 521-522; see also Q 319 Back

147   Ev 60, paras 15-16 Back

148   Qq 286, 289 Back

149   Q 417 Back

150   Ev 1, para 86 Back

151   ibid. Back

152   Ev 128, sections B1c, B4 Back

153   Ev 237, sections 1 & 4; see also Ev 132, p2 Back

154   Ev 207, note (iii) Back

155   HM Treasury, DAO (Gen) 13/03, 15 September 2003, paras 5-6  Back

156   HM Treasury, DAO (Gen) 13/03, 15 September 2003, para 4; See for example, Ev 227, para 2.3. Back

157   Q 281 Back

158   ibid. Back

159   ibid. Back

160   ibid. Back

161   Ev 207, note (iii) Back

162   ibid. Back

163   ibid Back

164   Ev 230, p 4 Back

165   Ev 89, p 3 Back

166   Ev 1, paras 83-84; Air Safety Support International is a not-for-profit wholly-owned subsidiary of the CAA with the primary objective of helping to provide a more cohesive system of civil aviation safety regulation in the UK Overseas Territories. Back

167   Civil Aviation Authority, Corporate Plan 2005/06, p 15; Ev 39, Q 7 Back

168   Ev 1, para 94 Back

169   ibid. Back

170   Ev 230, p4; Ev 89, p 2 Back

171   Ev 68, paras 12-13 Back

172   Ev 39, note 8 Back

173   ibid. Back

174   Ev 39, note 2 Back

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